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3. COMPANY FORMATION

e. Internal Documents

Your new company may need various internal documents in addition to the documents filed with government agencies.

Owners' Agreement

Every formal business entity must have an agreement among the owners. The form of the owners' agreement depends on the type of entity. An LLC has an “operating agreement”, a corporation needs “bylaws” or a “shareholders' agreement”, and a limited partnership has a “limited partnership agreement”.

Together, the articles and the owners' agreement govern the internal affairs of a company. The owners' agreement covers the same issues as the articles as well as new issues. Typical issues are business formation, capitalization, ownership structure, management rights and obligations, distributions, transfers, indemnification, liability limitations, and dispute resolution.

Occasionally, the applicable state laws may allow the owners' agreement to exist in oral form. For example, in California, the operating agreement of an LLC may be oral. However, a company with multiple owners should reduce the agreement to writing in order to manage expectations and avoid misunderstandings.

Owner Register

States may require companies to maintain a written register of the names, contact information, and ownership interests of the owners. Even if not required, such a register is advisable. Be sure to keep the register up-to-date.

Certificates of Ownership

States may require or allow companies to issue tangible certificates of ownership, such as stock certificates of a corporation. California and Delaware allow but do not require certificates. On the positive side, certificates may facilitate accurate record-keeping and promote employee morale. On the negative side, problems may arise when certificates are lost, destroyed, or transferred without authorization. The modern trend is to avoid using certificates.

Notices, Minutes, and Resolutions

States may require companies to hold annual meetings. Except for “close corporations” electing otherwise, all California corporations must hold annual meetings of the shareholders. California does not require annual meetings of the directors, but such meetings are customary and recommended. California LLC's and limited partnerships have no requirements for annual meetings.

Even if applicable law does not require meetings, the governing documents of a company may impose such a requirement.

Companies must conduct their meetings in compliance with applicable law and governing documents. The law and documents typically require the following, among other things:

• prior written notice to the participants, unless they unanimously waive the notice
• notes (“minutes”) taken by the Secretary
• votes and resolutions recorded by the Secretary
• written approval by the participants of the minutes and resolutions

Business Plan

Business plans are probably not required by applicable law. However, lenders and investors often want to see business plans as part of their "due diligence" process.

In addition, you should consider drafting a business plan in order to narrow your focus, develop concrete steps for achieving success, and lay the foundation for marketing materials such as brochures and websites. A business plan is especially useful for companies with multiple founders.